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September 21, 2017 1:45 PM, EDT
FedEx Quarterly Profits Decline on TNT Cyberattack, Hurricane Harvey
FedEx Freight FedEx Freight, North America’s largest LTL, posted gains in quarterly revenue, operating income, margin and revenue per hundredweight. (John Sommers II/Transport Topics)

FedEx Corp. remained profitable during the three months ended Aug. 31, but at a lower level than a year ago as the Memphis, Tenn.-based carrier had to overcome challenges from a malware attack in Europe as well as Hurricane Harvey in southeast Texas.

FedEx earned $596 million, or $2.19 a share, on revenue of $15.3 billion during its fiscal first quarter, the company reported Sept. 19. During the same period in 2016 the company had net income of $715 million, or $2.65, on sales of $14.66 billion.

FEDEX RATES: Most Will Increase by 4.9% on Jan. 1.

The company’s three main divisions — Express, Ground and Freight — posted gains in revenue, year-over-year. While Ground and Freight also boosted profits, Express had a decline in operating income because of Harvey’s effects.

“The first quarter posed significant operational challenges due to the TNT Express cyberattack and Hurricane Harvey, and I want to thank our team members for their extraordinary dedication and performance,” Chairman and CEO Frederick Smith said in the earnings statement.

Smith

“We are confident of our prospects for long-term profitable growth, and we reaffirm our commitment to improve operating income at the FedEx Express segment by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017,” Smith added.

FedEx ranks No. 2 on the Transport Topics Top 100 list of for-hire carriers.

Smith and other executives said during the earnings call that on June 27 FedEx’s TNT Express subsidiary was attacked by hackers who inserted malware in TNT servers in Ukraine.

Chief Information Officer Rob Carter said the virus was contained within TNT and did not transfer to other FedEx divisions or to the company’s customers.

FedEx estimated the damage (mainly lost revenue) at $300 million, or 79 cents a share. Company executives also added they are rebuilding their information technology capabilities not just to pre-crisis standards but better.

The Ground division had 8% growth in revenue but 9% growth in quarterly expenses. Operating income rose to $626 million from $610 million, but operating ratio — expenses as a percentage of revenue — deteriorated slightly to 86.5 from 85.8.

The Freight division, North America’s largest less-than-truckload carrier, posted gains in quarterly revenue, operating income, margin and revenue per hundredweight.

Freight earned $176 million on revenue of $1.75 billion during the quarter just ended, up from $135 million on revenue of $1.66 billion during the comparable time in 2016. Operating ratio improved to 90 from 91.9.

Smith spoke to those on the conference call about alternative fuels and autonomous vehicles. While management is looking at electric powertrains and compressed natural gas innovations, he said diesel will be the main power source for FedEx trucks for the foreseeable future.

Smith said autonomous vehicles are benefiting from “significant efforts, but none are ready for prime time yet, or talking about publicly.”

Analyst Jeffrey Kauffman told clients of Aegis Capital that Express should get a pass because of the highly atypical cyberattack, but that “investors are less likely to do so at FedEx Ground, which reports a 13.5% operating margin, nearly 80 basis points below our expectations, as costs continue to run above plan during the build out of Ground’s capabilities.”

Barclays analyst Brandon Oglenski said that while the IT hack was a costly ambush, “8% revenue growth in the important Ground segment and higher than forecast profitability suggest a robust domestic package environment.”

He added: “Further, gains in pricing across the businesses suggest a continued focus from management to improve profitability across the various operating networks. While we admit the TNT setback was more than some may have expected, if management can get operations back on track by the end of the year we see robust fundamentals driving strong top line outcomes for FedEx, which should support a solid long-term outlook for the shares.”